PINX:CBCO Coastal Banking Co Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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cbco_10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
(MARK ONE)                                                             

        þ  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period ended March 31, 2012

OR

        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the Transition Period from _________to_________

Commission File No. 000-28333
 
COASTAL BANKING COMPANY, INC.
(Exact name of registrant as specified in its charter)
 
South Carolina
 
58-2455445
(State or other jurisdiction
 
(I.R.S. Employer
of incorporation)
 
Identification No.)

36 Sea Island Parkway
Beaufort, SC 29907
(Address of principal executive
offices, including zip code)

(843) 522-1228
(Registrant's telephone number, including area code)
________________________________________________


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such report), and (2) has been subject to such filing requirements for the past 90 days.  YES þ  NO o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company.  See definition of “larger accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):
 
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
þ
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No þ

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 2,597,207 shares of common stock, $.01 par value, were issued and outstanding on May 10, 2012.
 


 
 

 
 
Index
 
     
Page No.
 
PART I. FINANCIAL INFORMATION
     
       
Item 1.
Financial Statements
     
         
 
Consolidated Balance Sheets – March 31, 2012 and December 31, 2011  
    3  
           
 
Consolidated Statements of Operations– Three Months Ended March 31, 2012 and 2011
    4  
           
 
Consolidated Statements of Comprehensive Income (Loss) – Three Months Ended March 31, 2012 and 2011
    5  
           
 
Consolidated Statements of Cash Flows - Three Months Ended March 31, 2012 and 2011
    6  
           
 
Notes to Consolidated Financial Statements 
    7  
           
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
    25  
           
Item 3. 
Quantitative and Qualitative Disclosure About Market Risk      
    39  
           
Item 4.
Controls and Procedures 
    39  
           
PART II. OTHER INFORMATION
       
         
Item 1. 
Legal Proceedings  
    40  
           
Item 1A. 
Risk Factors
    40  
           
Item 2. 
Unregistered Sales of Equity Securities and Use of Proceeds 
    40  
           
Item 3. 
Defaults Upon Senior Securities 
    40  
           
Item 4.
Removed and Reserved  
    40  
           
Item 5. 
Other Information 
    40  
           
Item 6.
Exhibits   
    41  

 
 
 
2

 
 
 
PART 1.  FINANCIAL INFORMATION
 
ITEM 1.    FINANCIAL STATEMENTS
Coastal Banking Company
Consolidated Balance Sheets
March 31, 2012 and December 31, 2011
 
   
March 31,
   
December 31,
 
   
2012
   
2011
 
   
(unaudited)
   
(audited)
 
Assets
           
Cash and due from banks
 
$
6,346,319
   
$
3,611,404
 
Interest-bearing deposits in banks
   
5,433,099
     
478,763
 
Federal funds sold
   
137,688
     
243,046
 
Securities available for sale, at fair value
   
18,476,408
     
22,505,649
 
Restricted equity securities, at cost
   
5,141,550
     
5,136,250
 
Loans held for sale, at fair value
   
46,773,200
     
36,122,381
 
                 
Loans, net of unearned income
   
249,074,531
     
254,667,452
 
Less allowance for loan losses
   
5,813,232
     
5,221,736
 
Loans, net
   
243,261,299
     
249,445,716
 
                 
Premises and equipment, net
   
7,346,976
     
7,309,083
 
Cash surrender value of life insurance
   
1,994,077
     
1,974,210
 
Intangible assets
   
17,365
     
22,651
 
Other real estate owned
   
18,313,315
     
15,423,903
 
Loan sales receivable
   
75,046,674
     
126,592,128
 
Other assets
   
9,946,800
     
8,734,053
 
Total assets
 
$
438,234,770
   
$
477,599,237
 
Liabilities and Shareholders’ Equity
               
Deposits:
               
Noninterest-bearing
 
$
22,656,969
   
$
20,476,198
 
Interest-bearing
   
340,013,865
     
334,195,148
 
Total deposits
   
362,670,834
     
354,671,346
 
                 
Securities sold under agreements to repurchase
   
––
     
8,766,000
 
Other borrowings
   
28,000,000
     
68,447,000
 
Junior subordinated debentures
   
7,217,000
     
7,217,000
 
Other liabilities
   
7,116,517
     
5,336,341
 
Total liabilities
   
405,004,351
     
444,437,687
 
                 
Commitments and contingencies
               
                 
Shareholders’ Equity:
               
Preferred stock, par value $.01; 10,000,000 shares authorized; 9,950 shares issued and outstanding at March 31, 2012 and December 31, 2011
   
9,669,758
     
9,651,627
 
Common stock, par value $.01; 10,000,000 shares authorized; 2,595,207 shares issued and outstanding at March 31, 2012 and December 31, 2011
   
25,952
     
25,952
 
Additional paid-in capital
   
41,418,869
     
41,395,811
 
Accumulated deficit
   
(18,353,563
   
(18,510,653
)
Accumulated other comprehensive income
   
469,403
     
598,813
 
Total shareholders’ equity
   
33,230,419
     
33,161,550
 
Total liabilities and shareholders’ equity
 
$
438,234,770
   
$
477,599,237
 

See accompanying notes to unaudited consolidated financial statements.
 
 
3

 

Coastal Banking Company
Consolidated Statements of Operations
For the Three Months Ended March 31, 2012 and 2011
(Unaudited)
 
   
2012
     
2011
Interest income:
           
Interest and fees on loans
 
$
4,327,947
   
$
3,963,074
 
Interest on taxable securities
   
212,865
     
343,385
 
Interest on nontaxable securities
   
2,018
     
50,908
 
Interest on deposits in other banks
   
2,072
     
6,546
 
Interest on federal funds sold
   
334
     
433
 
   Total interest income
   
4,545,236
     
4,364,346
 
           
Interest expense:
         
Interest on deposits
   
868,222
     
1,031,478
 
Interest on junior subordinated debentures
   
54,642
     
97,624
 
Interest on other borrowings
   
226,912
     
310,345
 
   Total interest expense
   
1,149,776
     
1,439,447
 
           
Net interest income
   
3,395,460
     
2,924,899
 
Provision for loan losses
   
1,017,000
     
515,000
 
   Net interest income after provision for loan losses
   
2,378,460
     
2,409,899
 
           
Noninterest income:
         
Service charges on deposit accounts
   
77,902
     
110,738
 
Other service charges, commissions and fees
   
75,202
     
72,777
 
SBA loan income
   
941,771
     
849,854
 
Mortgage banking income
   
9,293,780
     
1,368,494
 
Gain on sale of securities available for sale
   
141,019
     
––
 
Income from investment in life insurance contracts
   
19,867
     
20,194
 
Other income
   
67,656
     
28,266
 
   Total other income
   
10,617,197
     
2,450,323
 
           
Noninterest expenses:
         
Salaries and employee benefits
   
7,285,191
     
2,164,968
 
Occupancy and equipment expense
   
573,363
     
339,315
 
Advertising fees
   
1,406,559
     
49,660
 
Amortization of intangible assets
   
5,286
     
11,505
 
Audit fees
   
129,897
     
99,647
 
Data processing fees
   
322,718
     
251,031
 
Director fees
   
35,550
     
51,700
 
FDIC insurance expense
   
161,491
     
215,569
 
Legal and other professional fees
   
271,843
     
244,825
 
OCC examination fees
   
48,460
     
43,758
 
Other real estate expenses
   
787,475
     
657,485
 
Other operating
   
1,458,169
     
674,396
 
   Total other expenses
   
12,486,002
     
4,803,859
 
           
Income before income taxes
   
509,655
     
56,363
 
Income tax expense
   
210,060
     
41,131
 
   Net income
 
$
299,595
   
$
15,232
 
                 
Preferred stock dividends
   
142,505
     
141,473
 
Net income (loss) available to common shareholders
 
$
157,090
   
$
(126,241
)
Basic and diluted earnings (loss) per share available to common shareholders
 
$
.06
   
$
(.05
)

See accompanying notes to unaudited consolidated financial statements.

 
4

 
 
Coastal Banking Company
Consolidated Statements of Comprehensive Income (Loss)
For the Three Months Ended March 31, 2012 and 2011
(Unaudited)

   
2012
   
2011
 
Net income
 
$
299,595
   
$
15,232
 
Other comprehensive loss, net of tax:
               
Net unrealized holding losses arising during period,  net of tax benefit of $18,719 and $63,646
   
(36,337
   
(123,548
)
Reclassification adjustment for gains included  in net income, net of tax of $47,946
   
(93,073
)
   
––
 
 Total other comprehensive loss
   
(129,410
   
(123,548
)
  Comprehensive income (loss)
 
$
170,185
   
$
(108,316
)

See accompanying notes to unaudited consolidated financial statements.

 
5

 

Coastal Banking Company
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2012 and 2011
(Unaudited)

   
2012
   
2011
 
Cash flows from operating activities:
           
Net income
 
$
299,595
   
$
15,232
 
Adjustments to reconcile net income to net cash provided by operating activities: 
               
Depreciation, amortization and accretion
   
176,513
     
178,772
 
Amortization of intangible assets
   
5,286
     
11,505
 
Stock-based compensation expense
   
23,058
     
36,301
 
Provision for loan losses
   
1,017,000
     
515,000
 
Gain on sale of securities available for sale
   
(141,019
)
   
 
Net decrease in loan sales receivable
   
51,545,454
     
10,698,601
 
Write downs and losses on sale of other real estate owned
   
661,350
     
496,940
 
Proceeds from sales of other real estate owned
   
1,365,809
     
2,335,450
 
Increase in cash value of life insurance
   
(19,867
)
   
(20,194
)
Originations of mortgage loans held for sale
   
(435,337,953
)
   
(173,347,037
)
Proceeds from sales of mortgage loans held for sale
   
433,980,914
     
204,707,727
 
Net decrease in interest receivable
   
68,736
     
26,227
 
Net increase in interest payable
   
88,922
     
134,572
 
SBA loan income
   
(941,771
)
   
(849,854
)
Mortgage banking income
   
(9,293,780
)
   
(1,368,494
)
Net other operating activities
   
1,293,833
     
2,103,798
 
Net cash provided by operating activities
   
44,792,080
     
45,674,546
 
                 
Cash flows from investing activities:
               
Net increase in interest-bearing deposits in banks
   
(4,954,336
)
   
(16,336,346
)
Net (increase) decrease in federal funds sold
   
105,358
 
   
(183,293
)
Proceeds from maturities of securities available for sale
   
2,349,741
     
3,712,454
 
Proceeds from sale of securities available for sale
   
1,554,287
     
 
Net change in restricted equity securities
   
(5,300
)
   
15,000
 
Net decrease in loans
   
250,846
     
915,089
 
Purchase of premises and equipment
   
(144,249
)
   
(87,669
)
Net cash used in investing activities
   
(843,653
)
   
(11,964,765
)
                 
Cash flows from financing activities:
               
Net increase (decrease) in deposits
   
7,999,488
     
(21,989,509
Net decrease in securities sold under agreements to repurchase
   
(8,766,000
)
   
 
Proceeds from other borrowings
   
7,000,000
     
 
Repayment of other borrowings
   
(47,447,000
)
   
(8,500,000
)
Net cash used in financing activities
   
(41,213,512
)
   
(30,489,509
)
                 
Net increase in cash and due from banks
   
2,734,915
     
3,220,272
 
Cash and due from banks at beginning of period
   
3,611,404
     
1,823,132
 
Cash and due from banks at end of period
 
$
6,346,319
 
 
$
5,043,404
 
                 
Supplemental disclosures of cash flow information:
               
Cash paid during the year for interest
 
$
1,060,854
   
$
1,304,875
 
Cash paid during the year for income taxes
 
$
14,062
   
$
106,000
 
                 
Noncash Transactions:
               
Principal balances of loans transferred to other real estate owned
 
$
4,916,571
   
$
2,682,586
 

See accompanying notes to unaudited consolidated financial statements.

 
6

 

Notes to Consolidated Financial Statements – March 31, 2012 and 2011 (Unaudited) and December 31, 2011

Note 1 - Basis of Presentation

Coastal Banking Company, Inc. (the “Company”) is organized under the laws of the State of South Carolina for the purpose of operating as a bank holding company for CBC National Bank (the “Bank”). The Bank commenced business on May 10, 2000 as Lowcountry National Bank. The Company acquired First National Bank of Nassau County, which began its operations in 1999, through its merger with First Capital Bank Holding Corporation (“First Capital”) on October 1, 2005. On October 27, 2006, the Company acquired the Meigs, Georgia office of the Bank through merger of Cairo Banking Co. with and into the Bank. On August 10, 2008, Lowcountry National Bank and First National Bank of Nassau County merged into one charter. Immediately after the merger, the name of the surviving bank was changed to CBC National Bank and the main office relocated to 1891 South 14th Street, Fernandina Beach, Nassau County, Florida. The Bank’s branches did business under the trade names “Lowcountry National Bank,” “First National Bank of Nassau County,” and “The Georgia Bank” in their respective markets.  During 2011, the Florida and Georgia Bank branches replaced their local market trade names with CBC National Bank, and the South Carolina branches replaced their local trade name during the first quarter of 2012.  The Bank provides full commercial banking services to customers throughout Beaufort County, South Carolina; Nassau County, Florida; and Thomas County, Georgia and is subject to regulation by the Office of the Comptroller of the Currency (the “OCC”) and the Federal Deposit Insurance Corporation (the “FDIC”).  The Company is subject to regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”).

The Bank also has loan production offices in Savannah, Georgia and Jacksonville, Florida, as well as a residential mortgage banking division headquartered in Atlanta, Georgia. The mortgage banking division operates thirteen retail residential loan production offices in California, Connecticut, Florida, Georgia, Kansas, Maryland, New Jersey, New York, and Ohio.

The Company also has an investment in Coastal Banking Company Statutory Trust I (“Trust I”) and Coastal Banking Company Statutory Trust II (“Trust II”). Both trusts are special purpose subsidiaries organized for the sole purpose of issuing trust preferred securities.

The consolidated financial statements include the accounts of the Company and the Bank.  All intercompany accounts and transactions have been eliminated in consolidation.

The accompanying financial statements have been prepared in accordance with the requirements for interim financial statements and, accordingly, they omit disclosures which would substantially duplicate those contained in the Annual Report on Form 10-K for the year ended December 31, 2011.  The financial statements as of March 31, 2012 and for the interim periods ended March 31, 2012 and 2011 are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation.  The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.  The financial information as of December 31, 2011 has been derived from the audited financial statements as of that date.  For further information, refer to the financial statements and the notes included in the Company’s 2011 annual report to shareholders on Form 10-K as filed with the Securities and Exchange Commission.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates that affect the amounts of assets and liabilities and changes therein.  Actual results could differ from those estimates.

Accounting Policies Recently Adopted
 
ASC Topic 310 “Receivables.”  New authoritative accounting guidance under ASC Topic 310, “Receivables,” amended prior guidance to provide a greater level of disaggregated information about the credit quality of loans and leases and the Allowance for Loan and Lease Losses (the “Allowance”).  The new authoritative guidance also requires additional disclosures related to credit quality indicators, past due information, and information related to loans modified in a troubled debt restructuring.  The new authoritative guidance amends only the disclosure requirements for loans and leases and the allowance.  The Company adopted the period end disclosures provisions of the new authoritative guidance under ASC Topic 310 in the reporting period ending December 31, 2010.  Adoption of the new guidance did not have an impact on the Company’s statements of income and financial condition.  The Company adopted the disclosures provisions of the new authoritative guidance about activity that occurs during a reporting period on January 1, 2011; the adoption did not have an impact on the Company’s statements of income and financial condition.  The Company adopted the disclosures provisions related to loans modified in a troubled debt restructuring on July 1, 2011; the adoption did not have an impact on the Company’s statements of income and financial condition.
 
 
7

 
 
ASC Topic 310 “Receivables,” Subtopic 310-40 “Troubled Debt Restructurings by Creditors.”  New authoritative accounting guidance under Subtopic 310-40, “Receivables — Troubled Debt Restructurings by Creditors” amended prior guidance to provide assistance in determining whether a modification of the terms of a receivable meets the definition of a troubled debt restructuring.  The new authoritative guidance provides clarification for evaluating whether a concession has been granted and whether a debtor is experiencing financial difficulties.  The new authoritative guidance was effective for the reporting periods beginning after June 15, 2011 and was applied retrospectively to restructurings occurring on or after the beginning of the fiscal year of adoption.  The Company adopted this new guidance on July 1, 2011 and it did not have an impact on the Company’s statements of income and financial condition.
 
ASC Topic 820 “Fair Value Measurement.”  New authoritative accounting guidance under ASC Topic 820, “Fair Value Measurement” amended prior guidance to achieve common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards.  The new authoritative guidance clarifies the highest and best use and valuation premise, measuring the fair value of an instrument classified in a reporting entity’s shareholders’ equity, measuring the fair value of financial instruments that are managed within a portfolio, and the application of premiums and discounts in a fair value measurement. The new authoritative guidance also requires additional disclosures about fair value measurements. The Company adopted this new guidance on January 1, 2012 and it did not have an impact on the Company’s statements of income and financial condition.

ASC Topic 220 “Comprehensive Income.”  New authoritative accounting guidance under ASC Topic 220, “Comprehensive Income” amended prior guidance to increase the prominence of items reported in other comprehensive income.  The new guidance requires that all changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  The new guidance does not change the items that must be reported in other comprehensive income.  The Company adopted this new guidance on January 1, 2012 and it did not have an impact on the Company’s statements of income and financial condition.

Note 2 -Regulatory Oversight, Capital Adequacy, Operating Results, Liquidity and Management’s Plans

Regulatory Oversight

The Bank entered into a formal agreement with the OCC on August 26, 2009 (the “Agreement”) that imposes certain operational and financial directives on the Bank.  The specific directives of the Agreement address the credit risk in the Bank’s loan portfolio, action required to protect the Bank’s interest in criticized assets, adherence to the Bank’s written profit plan to improve and sustain earnings, limitations on the maximum allowable level of brokered deposits, excluding reciprocal CDARS deposits, and the establishment of a board level Compliance Committee to monitor the Bank’s adherence to the Agreement.

Additionally, in response to a request by the Federal Reserve Bank of Richmond, the Board of Directors of Coastal Banking Company, Inc. adopted a resolution on January 27, 2010.  This resolution required that the Company obtain prior approval of the Federal Reserve Board before incurring additional debt, purchasing or redeeming its capital stock, or declaring or paying cash dividends to common shareholders. The resolution also required that the Company provide the Federal Reserve Bank with prior notification before using its cash assets for purposes other than investments in obligations or equity of the Bank, investments in short-term, liquid assets, or payment of normal and customary expenses, including regularly scheduled interest payments on existing debt.  

On November 17, 2010 the Company entered into a Memorandum of Understanding (“MOU”), an informal enforcement action, with the Federal Reserve Bank of Richmond in lieu of the board resolution described above.  The terms of the MOU are substantially similar to the terms of the Board Resolution.  Generally, the MOU requires the Company to obtain prior approval of the Federal Reserve Bank before incurring additional debt, purchasing or redeeming its capital stock, or declaring or paying cash dividends on its securities, including dividends on its common stock and TARP preferred stock, and interest on its trust preferred securities.  Additionally, the MOU requires the Company to comply with banking regulations that prohibit certain indemnification and severance payments and that require prior approval of any appointment of any new directors or the hiring or change in position of any senior executive officers of the Company.  The MOU also requires the submission of quarterly progress reports.

As a result of the Agreement, and the MOU, the Bank and the Company are now operating under heightened regulatory scrutiny and monitoring.  Management has taken aggressive steps to address the components of the Agreement and has frequent contact with the OCC as we work to improve our financial condition and comply with all regulatory directives.  Monitoring of our progress by our regulators is much more frequent and includes interim on-site visits as well as ongoing telephone consultations.  Management recognizes that failure to adequately address the Agreement and the MOU could result in additional actions by the banking regulators with the potential for more severe operating restrictions and oversight requirements, including, but not limited to, the issuance of a consent order and civil money penalties.

 
8

 
 
Capital Adequacy

As of March 31, 2012, the Bank exceeded all of the regulatory capital ratio levels to be categorized as “well capitalized.”  In light of current market conditions and the Bank’s current risk profile, the Bank has determined that it must achieve and maintain a minimum ratio of total capital to risk-weighted assets of 12% and a minimum leverage ratio of 8% to be considered well capitalized under these market conditions.  The Bank exceeded these internal capital ratios as well.

Key to our efforts to maintain existing capital adequacy was the need for the Bank to return to profitability through a continued focus on increasing core earnings and decreasing the levels of adversely classified and nonperforming assets. Management has pursued a number of strategic alternatives to improve the core earnings of the Bank and to reduce the level of classified assets. Current market conditions for banking institutions, the overall uncertainty in financial markets and the Bank’s high level of nonperforming assets are potential barriers to the success of these strategies. If current adverse market factors continue for a prolonged period of time, new adverse market factors emerge, and/or the Bank is unable to successfully execute its plans or adequately address regulatory concerns in a sufficient and timely manner, it could have a material adverse effect on the Bank’s business, results of operations and financial position.

Operating Results

The Company recorded net income of $300,000 for the three months ended March 31, 2012 compared to net income of $15,000 for the three months ended March 31, 2011.  The increase in current year net income is a result of higher mortgage banking income, partially offset by higher direct mortgage costs, including salaries and benefits and advertising costs.  During both periods, we experienced excessive levels of nonperforming assets, which caused the Company to record increased carrying costs on foreclosed properties and losses on the sale of foreclosed properties. Carrying costs on foreclosed assets are expected to remain elevated throughout 2012 as the Company continues to liquidate these nonperforming assets.

Management has implemented a number of actions in an effort to improve earnings, including continued emphasis on non-interest income from mortgage banking and small business lending activity, significant reductions to the cost of interest bearing liabilities and strict controls over other operating expenses.  These actions have been effective in improving core earnings in 2011 and 2012; however, asset quality charges throughout the period continued to negatively impact earnings.  Management will continue to focus on asset quality levels as concerns remain that the existing negative economic conditions may worsen, resulting in continued losses that will hinder our ability to return to profitability and further erode capital levels.

Liquidity

Management monitors liquidity on a daily basis and forecasts liquidity needs over a 90 day horizon in order to anticipate and provide for future needs.  We also utilize a comprehensive contingency funding policy that uses several key liquidity ratios or metrics to define different stages of the Company’s overall liquidity position.  This policy defines actions or strategies that are employed based on the liquidity position of the Company to reduce the risk of a future liquidity shortfall.

The primary sources of liquidity are cash and cash equivalents, deposits, scheduled repayments of loans, unpledged investment securities, available borrowing facilities and proceeds from loan sales receivable.  Within deposits we utilize retail deposits from our branch locations, a modest level of brokered deposits, CDARS reciprocal deposits and deposits from other insured depository institutions.  The Agreement requires that our brokered deposits, excluding reciprocal CDARs, not exceed 10% of our total deposits, which is consistent with our existing internal liquidity policy.  As a result of our existing internal liquidity policy, we have been and anticipate continuing to be in compliance with the brokered deposit limitation provision of the Agreement.  Although the FDIC Call Report defines CDARS reciprocal deposits as brokered deposits, CDARS reciprocal deposits are excluded from the brokered deposit limitation provision in the Agreement.  At March 31, 2012 we have the capacity to raise up to an additional $10,064,000 in brokered deposits, if needed, and continue to remain in compliance with the 10% limitation in the Agreement.  Our borrowing facilities include collateralized repurchase agreements and unsecured federal funds lines with correspondent banks, as well as borrowing agreements with the Federal Home Loan Bank of Atlanta and the Federal Reserve Bank collateralized by pledged loans and securities.

As of March 31, 2012, the Company had $172.3 million in total borrowing capacity, of which we had utilized $56.3 million or 32.7%, leaving remaining available liquidity of $116 million.  Additionally, loans available for sale are considered by management as a key source of liquidity as a result of the speed with which these loans are sold and settled for cash.  Management expects that, on average, loans originated for sale will be sold and converted to cash within 18 to 20 business days after the loan is originated.  The balance of loans available for sale averaged just over $133 million during the first three months of 2012.  Accordingly, in the event of a liquidity crisis, we anticipate having the ability to slow or stop loan origination activity to allow the loans available for sale to convert into cash. Based on current and expected liquidity needs and sources, management expects the Company to be able to meet all obligations as they become due.
 
 
9

 

Note 3 – Earnings (losses) Per Share

The following table sets forth the computation of basic and diluted earnings (losses) per share for the three months ended March 31.

   
For the three months ended March 31,
 
   
2012
   
2011
 
Net income
 
$
299,595
   
$
15,232
 
Preferred stock dividends
   
(142,505
)
   
(141,473
)
Net income (loss) available to common shareholders
 
$
157,090
   
$
(126,241
                 
Weighted average common shares
   
2,583,885
     
2,571,735
 
Effect of dilutive securities
   
360
     
––
 
Diluted average common shares
   
2,584,245
     
2,571,735
 
                 
Earnings (losses) per common share
 
$
0.06
   
$
(0.05
Diluted earnings (losses) per common share
 
$
0.06
   
$
(0.05

Note 4 – Investment Securities

Investment securities are as follows:

   
March 31, 2012
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
Available for sale
                       
State and municipal securities
 
$
70,547
   
$
5,404
   
$
   
$
75,951
 
Mortgage-backed securities
   
17,694,644
     
712,534
     
(6,721
)
   
18,400,457
 
   
$
17,765,191
   
$
717,938
   
$
(6,721
)
 
$
18,476,408
 

   
December 31, 2011
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
Available for sale
                       
State and municipal securities
 
$
1,800,628
   
$
119,336
   
$
   
$
1,919,964
 
Mortgage-backed securities
   
19,797,729
     
797,364
     
(9,408
)
   
20,585,685
 
   
$
21,598,357
   
$
916,700
   
$
(9,408
)
 
$
22,505,649
 

The following table shows gross unrealized losses and fair value of securities, aggregated by category and length of time that the securities have been in a continuous unrealized loss position, at March 31, 2012.
 
Investment securities available for sale:

   
Less than 12 Months
   
12 Months or More
   
Total
 
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
 
Mortgage-backed
  securities
 
$
   
$
   
$
1,276,266
   
$
(6,721
)
 
$
1,276,266
   
$
(6,721
)
Total
 
$
   
$
   
$
1,276,266
   
$
(6,721
)
 
$
1,276,266
   
$
(6,721
)

As of March 31, 2012, two individual securities available for sale were in a continuous loss position for twelve months or more. The Company has reviewed these investment securities in accordance with its accounting policy for other than temporary impairment and believes, based on industry analyst reports and credit ratings, that the deterioration in value, as of March 31, 2012, was attributable to changes in market interest rates, and not due to the specific credit quality of the issuer. The unrealized loss is considered temporary because the security issuer carries an acceptable credit profile and the repayment sources of principal and interest are backed by the full faith and credit of the U.S. Government. The Company has the ability and intent to hold this security until such time as the value recovers or the security matures.
 
 
10

 

The following table shows gross unrealized losses and fair value of securities, aggregated by category and length of time that the securities have been in a continuous unrealized loss position, at December 31, 2011.
 
Investment securities available for sale:

   
Less than 12 Months
   
12 Months or More
   
Total
 
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
 
Mortgage-backed
  securities
 
$
901,726
   
$
(3,870
)
 
$
1,214,800
   
$
(5,538
)
 
$
2,116,526
   
$
(9,408
)
Total
 
$
901,726
   
$
(3,870
)
 
$
1,214,800
   
$
(5,538
)
 
$
2,116,526
   
$
(9,408
)

As of December 31, 2011, one individual security available for sale was in a continuous loss position for twelve months or more. The Company has reviewed this investment security in accordance with its accounting policy for other than temporary impairment and believes, based on industry analyst reports and credit ratings, that the deterioration in value, as of December 31, 2011, was attributable to changes in market interest rates, and not due to the specific credit quality of the issuer. The unrealized loss is considered temporary because the security issuer carries an acceptable credit profile and the repayment sources of principal and interest are backed by the full faith and credit of the U.S. Government. The Company has the ability and intent to hold this security until such time as the value recovers or the security matures.

In addition, as of December 31, 2011 we recorded an other-than-temporary impairment loss on one municipal security that was in a continuous loss position for over twelve months.  The deterioration was due to the specific credit quality of the issuer, and management sold the security during the first quarter of 2012.  Because the security’s amortized cost was reduced to equal its fair value at December 31, 2011, it was not included in the unrealized loss table above.

The amortized cost and estimated fair value of investment securities at March 31, 2012, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

   
Amortized Cost
   
Fair Value
 
Available for sale
           
Due from five to ten years
  $ 51,383     $ 55,865  
Due after ten years
    19,164       20,086  
Mortgage-backed securities
    17,694,644       18,400,457  
    $ 17,765,191     $ 18,476,408  

 
Securities were pledged to secure public deposits and Federal Home Loan Bank borrowings with an amortized cost and fair value of $9,313,000 and $9,889,000, respectively, as of March 31, 2012 and $9,147,000 and $9,722,000, respectively, as of December 31, 2011.  Pledged securities may not be sold without first pledging replacement securities and obtaining consent of the party to whom the securities are pledged.

Securities were sold under agreement to repurchase with an amortized cost and fair value of $9,433,000 and $9,640,000, respectively, as of December 31, 2011.  No securities were sold under agreement to repurchase as of March 31, 2012.

Gains and losses on sales of securities available for sale consist of the following:

   
For the Three Months Ended March 31,
 
   
2012
   
2011
 
Gross gains on sales of securities
 
$
147,342
   
$
 
Gross losses on sales of securities
   
(6,323
)
   
 
Net realized gains on sales of securities available for sale
 
$
141,019
   
$
 

 
11

 
 
Note 5 — Loans and allowance for loan losses

The composition of loans is summarized as follows:

   
March 31,
2012
   
December 31,
2011
 
Commercial and financial
 
$
11,353,979
   
$
15,039,027
 
Real estate – construction, commercial
   
35,139,169
     
39,760,844
 
Real estate – construction, residential
   
10,088,746
     
11,602,247
 
Real estate – mortgage, commercial
   
93,900,823
     
86,646,154
 
Real estate – mortgage, residential
   
96,952,817
     
99,918,177
 
Consumer installment loans
   
1,533,997
     
1,543,003
 
Other
   
105,000
     
158,000
 
Gross loans
   
249,074,531
     
254,667,452
 
Less: Allowance for loan losses
   
5,813,232
     
5,221,736
 
Net loans
 
$
243,261,299
   
$
249,445,716
 

The Bank grants loans and extensions of credit to individuals and a variety of businesses and corporations located in its general trade areas of Beaufort County, South Carolina, Nassau County, Florida and Thomas County, Georgia. Although the Bank has a diversified loan portfolio, a substantial portion of the loan portfolio is collateralized by improved and unimproved real estate and is dependent upon the real estate market.
 
A loan is considered impaired, in accordance with the impairment accounting guidance (FASB ASC 310-10-35-16), when, based on current information and events, it is probable that the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan.  Additionally, recent FASB guidance requires that by definition, all loans classified as troubled debt restructurings must also be classified as impaired.  In cases where management believes a restructured loan will return all amounts due under the restructured loan terms, and those terms do not include the loss of any portion of the original principal balance, restructured loans are not internally classified, monitored or managed as impaired loans.  Accordingly, GAAP reporting requirements result in a higher level of loans classified as impaired than are considered as impaired by management.  Impaired loans as defined by GAAP are summarized as follows:

   
March 31, 2012
 
(In thousands)
 
Recorded Investment
   
Unpaid Principal Balance
   
Recorded Allowance
   
Average Recorded Investment
   
Interest Income Recognized
 
With no related allowance recorded:
                             
   Commercial, financial & agricultural
  $ 231     $ 231     $     $ 244     $ 1  
   Real estate - construction
    3,381       4,174             3,403        
   Real estate - mortgage
    5,178       5,519             5,186       46  
With an allowance recorded:
                                       
   Commercial, financial & agricultural
    670       670       192       673       5  
   Real estate - construction
    2,931       2,980       480       2,931       13  
   Real estate - mortgage
    3,760       3,840       1,318       3,791       17  
Total impaired loans:
                                       
   Commercial, financial & agricultural
  $ 901     $ 901     $ 192     $ 917     $ 6  
   Real estate - construction
  $ 6,312     $ 7,154     $ 480     $ 6,334     $ 13  
   Real estate - mortgage
  $ 8,938     $ 9,359     $ 1,318     $ 8,977     $ 63  

   
December 31, 2011
 
(In thousands)
 
Recorded Investment
   
Unpaid Principal Balance
   
Recorded Allowance
   
Average Recorded Investment
   
Interest Income Recognized
 
With no related allowance recorded:
                             
   Commercial, financial & agricultural
  $ 343     $ 343     $     $ 274     $ 13  
   Real estate - construction
    5,218       6,801             5,385       113  
   Real estate - mortgage
    5,652       6,032             6,042       158  
With an allowance recorded:
                                       
   Commercial, financial & agricultural
    510       510       98       1,375       54  
   Real estate - construction
    2,838       2,870       213       2,809       94  
   Real estate - mortgage
    4,461       4,721       826       4,393       92  
Total impaired loans:
                                       
   Commercial, financial & agricultural
  $ 853     $ 853     $ 98     $ 1,649     $ 67  
   Real estate - construction
  $ 8,056     $ 9,671     $ 213     $ 8,194     $ 207  
   Real estate - mortgage
  $ 10,113     $ 10,753     $ 826     $ 10,435     $ 250  

 
12

 
 
As of March 31, 2012, there are four restructured loans with a recorded investment of $2,451,000 included in the impaired loans table above, as required by GAAP, that management has not internally classified as impaired.  These loans are performing in accordance with their restructured terms such that we expect to recover all loan principal and interest, however, these loans meet the GAAP definition of a TDR.  While these loans meet the technical definition of a TDR and must therefore be classified as impaired under GAAP, management evaluates these loans as non-impaired. 

Loans exhibiting one or more of the following attributes are placed on a nonaccrual status:
a.)  
Principal and/or interest is 90 days or more delinquent, unless the obligation is (i) well secured by collateral with a realizable value sufficient to discharge the debt including accrued interest in full, and (ii) in the process of collection, which is reasonably expected to result in repayment of the debt or in its restoration to a current status.
b.)  
A borrower’s financial condition has deteriorated to such an extent, or some condition exists, that makes collection of interest and/or principal in full unlikely in management’s opinion.
c.)  
Foreclosure or legal action has been initiated as a result of default by the borrower on the terms of the debt.

The following is a summary of current, past due and nonaccrual loans:

 
 
March 31, 2012
 
(In thousands)
 
30-59
Days
 Past Due
   
60-89 Days
Past Due
   
Greater than
 90 Days
Past Due & Accruing
   
Nonaccrual
   
Total Past Due & Nonaccrual
   
Current Loans
   
Total Loans
 
Commercial and financial
  $ 21     $ ––     $ ––     $ 161     $ 182     $ 11,172     $ 11,354  
Real estate – construction,
  commercial
    ––       ––       ––       6,967       6,967       28,172       35,139  
Real estate – construction, residential
    ––       ––       ––       104       104       9,985       10,089  
Real estate – mortgage, commercial
    ––       ––       ––       4,669       4,669       89,232       93,901  
Real estate – mortgage, residential
    1,215       ––       ––       1,624       2,839       94,114       96,953  
Consumer installment loans
    1       ––       ––       2       3       1,531       1,534  
Other
    ––       ––       ––       ––       ––       105       105  
    $ 1,237     $ ––     $ ––     $ 13,527     $ 14,764     $ 234,311     $ 249,075  

 
 
December 31, 2011
 
(In thousands)
 
30-59
Days
 Past Due
   
60-89 Days
Past Due
   
Greater than
 90 Days
Past Due & Accruing
   
Nonaccrual
   
Total Past Due & Nonaccrual
   
Current Loans
   
Total Loans
 
Commercial and financial
  $ 22     $ 28     $ ––     $ 179     $ 229     $ 14,810     $ 15,039  
Real estate – construction,
  commercial
    444       ––       ––       8,705       9,149       30,612       39,761  
Real estate – construction, residential
    ––       53       ––       73       126       11,476       11,602  
Real estate – mortgage, commercial
    ––       ––       ––       5,035       5,035       81,611       86,646  
Real estate – mortgage, residential
    676       ––       ––       1,922       2,598       97,320       99,918  
Consumer installment loans
    ––       ––       ––       23       23       1,520       1,543  
Other
    ––       3       ––       ––       3       155       158  
    $ 1,142     $ 84     $ ––     $ 15,937     $ 17,163     $ 237,504     $ 254,667  

Management evaluates all loan relationships periodically in order to assess the financial strength of the borrower and the value of any underlying collateral.  Based on the results of these evaluations, management will assign internal loan classifications to designate the relative strength of the credit.  The internal grades used are Pass, Special Mention, and Substandard.  Within the Pass classification, there are sub grades that range from High to Acceptable, all of which indicate that the loan is expected to continue to perform in accordance with its terms.  Loans with potential weaknesses that deserve management’s close attention are classified as Special Mention.  If the potential weakness in a Special Mention loan was to go uncorrected, it could result in deteriorating prospects for continued loan performance at some future date; however, the loan is not currently adversely classified.  The Substandard classification is assigned to loans that are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.  These loans have a well-defined weakness that jeopardizes the payment of the debt or the liquidation of the collateral securing the debt, and are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.  Loans classified as Special Mention or Substandard are subject to increased monitoring by management.  This typically includes frequent contact with the borrower to actively manage the borrowing relationship as needed to rehabilitate or mitigate the weakness, or potential weakness, identified. 

 
13

 

A summary of loan credit quality is presented below:

(In thousands)
 
March 31, 2012
 
   
Pass
   
Special Mention
   
Substandard
   
Total
 
Commercial and financial
  $ 10,216     $ 456     $ 682     $ 11,354  
Real estate – construction, commercial
    24,497       520       10,122       35,139  
Real estate – construction, residential
    9,738       98       253       10,089  
Real estate – mortgage, commercial
    77,018       8,137       8,746       93,901  
Real estate – mortgage, residential
    90,697       2,661       3,595       96,953  
Consumer installment loans
    1,479       5       50       1,534  
Other
    105       ––       ––       105  
    $ 213,750     $ 11,877     $ 23,448     $ 249,075  

(In thousands)
 
December 31, 2011
 
   
Pass
   
Special Mention
   
Substandard
   
Total
 
Commercial and financial
  $ 14,166     $ 216     $ 657     $ 15,039  
Real estate – construction, commercial
    25,526       483       13,752       39,761  
Real estate – construction, residential
    11,331       53       218       11,602  
Real estate – mortgage, commercial
    69,713       7,065       9,868       86,646  
Real estate – mortgage, residential
    93,748       2,317       3,853       99,918  
Consumer installment loans
    1,491       12       40       1,543  
Other
    155       3       ––       158  
    $ 216,130     $ 10,149     $ 28,388     $ 254,667  

Risk Elements in the Loan Portfolio

The following is a summary of risk elements in the loan portfolio:

   
Loans with Interest Only Payments
     
(In thousands)
 
March 31, 2012
       
December 31, 2011
     
Commercial and financial
  $ 4,916   10 %   $ 4,827   10 %
Real estate – construction, commercial
    14,080   30 %     14,901   30 %
Real estate – construction, residential
    1,678   4 %     2,691   5 %
Real estate – mortgage, commercial
    10,445   22 %     10,143   21 %
Real estate – mortgage, residential
    16,304   34 %     16,597   34 %
Consumer installment loans
    124   –– %     128   –– %
Other
    105   –– %     105   –– %
    $ 47,652         $ 49,392      

As shown above, we have a moderate concentration of interest only loans in our portfolio, and such loans are generally regarded as carrying a higher risk profile than fully amortizing loans.  It is important to note that none of the interest only loans in our portfolio allow negative amortization, nor do we have any loans with capitalized interest reserves.

   
Geographic Concentration of Loan Portfolio
 
   
March 31, 2012
 
(In thousands)
 
Florida
   
Georgia
   
South Carolina
   
Other
 
Commercial and financial
  $ 5,876     $ 577     $ 4,753     $ 148  
Real estate – construction, commercial
    9,459       4,814       18,938       1,928  
Real estate – construction, residential
    3,497       871       5,494       227  
Real estate – mortgage, commercial
    36,394       16,219       39,287       2,001  
Real estate – mortgage, residential
    37,580       21,631       30,782       6,960  
Consumer installment loans
    449       343       663       79  
Other
    ––       105       ––       ––  
    $ 93,255     $ 44,560     $ 99,917     $ 11,343  

   
Geographic Concentration of Loan Portfolio
 
   
December 31, 2011
 
(In thousands)
 
Florida
   
Georgia
   
South Carolina
   
Other
 
Commercial and financial
  $ 5,760     $ 1,329     $ 7,790     $ 160  
Real estate – construction, commercial
    12,400       6,157       19,276       1,928  
Real estate – construction, residential
    3,696       2,114       5,560       232  
Real estate – mortgage, commercial
    34,962       12,888       36,781       2,015  
Real estate – mortgage, residential
    37,042       23,059       30,989       8,828  
Consumer installment loans
    507       327       684       25  
Other
    ––       155       3       ––  
    $ 94,367     $ 46,029     $ 101,083     $ 13,188  
 
 
14

 

We also monitor and evaluate several other loan portfolio characteristics at a total portfolio level rather than by major loan category.  These characteristics include:

Junior Liens – Loans secured by liens in subordinate positions tend to have a higher risk profile than loans secured by liens in the first or senior position.  At March 31, 2012 the Company held $20,901,000 of loans secured by junior liens, which represented approximately 8.4% of the total net loan portfolio.  Net loan charge-offs was $143,000 in the quarter ended March 31, 2012 for all loans secured by junior liens for an annualized loss rate of 2.7%.  At December 31, 2011 the Company held $21,470,000 of loans secured by junior liens which represented approximately 8.4% of the total net loan portfolio.  Historical loss experience as measured by net loan charge offs was $232,000 in the year ended December 31, 2011 for all loans secured by junior liens for an annualized loss rate of 1.1%.

High Loan to Value Ratios – Typically the Company will not originate a new loan with a loan to value (LTV) ratio in excess of 100%.  However, declines in collateral values can result in the case of an existing loan renewal with an LTV ratio in excess of 100% based on the current appraised value of the collateral.  In such cases the borrower may be asked to pledge additional collateral or to renew the loan for a lesser amount.  If the borrower lacks the ability to pay down the loan or provide additional collateral, but has the ability to continue to service the debt, the loan will be renewed with an LTV ratio in excess of 100%.  At March 31, 2012 the loan portfolio included 44 loans with an aggregate balance of $17,882,000, or 7.2% of the net loan portfolio, with LTV ratios in excess of 100%.  At December 31, 2011 the loan portfolio included 39 loans with an aggregate balance of $12,661,000, or 5.0% of the net loan portfolio, with LTV ratios in excess of 100%.

Restructured Loans – Historically, the Company has followed a conservative approach by classifying any loan as restructured whenever the terms of a loan were adjusted to the benefit of any borrower in financial distress, regardless of the status of the loan at the time of restructuring.  In some cases we have restructured loans for borrowers who were not delinquent, but for various reasons these borrowers were experiencing financial distress that raised a doubt about their continued ability to make payments under current terms. By adjusting the terms of the loan to better fit the borrower’s current financial condition, expectations are that the loan will avoid a future default.  In other cases we have restructured loans for borrowers who were in default at the time the loan terms were restructured.  The expectation is that by adjusting the terms of such loans, the borrower may begin to make payments again based on the improved loan terms.

The types of changes that are made for troubled borrowers to restructure their obligations include the following:
  
Deferral of one or more scheduled loan payments to a future date
  
Temporary or permanent reduction of the loan interest rate
  
Conversion from principal and interest payment term to an interest only payment term on a temporary basis, or until maturity
  
Forgiveness of accrued but uncollected interest
  
Extension of loan maturity date
  
Reduction in principal due under the loan agreement

The potential financial effects of restructuring troubled debts includes a reduction in the level of interest income collected, a complete loss of interest income, or a loss of some portion of the original loan principal.  All troubled debt restructurings are tested for impairment.  If a loan is considered to be collateral dependent, the measurement of impairment is based on the fair value of the collateral, net of estimated liquidation costs.  If the loan is not considered to be collateral dependent, the present value of expected cash flows is used to determine any amount of impairment.  Any impairment is then charged to the allowance for loan and lease losses or designated as a specific reserve, and as such will be considered as a component of the reserve calculation.

For regulatory purposes, in 2010 and prior years, restructured loans that were accruing interest (not on nonaccrual status) would be reported as performing restructured loans until the end of the fiscal year in which the restructure occurred.  At the beginning of the following fiscal year, the “restructured” designation for these performing restructured loans was removed, provided the borrower was paying in accordance with the restructured loan terms and the loan had a market rate of interest.

Recent interpretations of the topic of restructured loans by the Company’s primary regulator will effectively prohibit the practice of removing the “restructured” designation from any restructured loan during the life of the loan, beginning with the third quarter of 2011.  For 2011 and later, all restructured loans will continue to be reported as restructured, even if (1) the underlying conditions that resulted in the borrower’s financial distress were cured, (2) the loan terms were modified back to current fair value levels, (3) the loan is current and accruing interest, and (4) the borrower has not missed a payment since the loan was restructured.  As a result, expectations are that the level of restructured loans will continue to increase in the future.
 
 
15

 
 
The following table provides a summary of all loans that are currently designated as restructured for regulatory purposes.

   
March 31, 2012
   
December 31, 2011
 
Troubled debt restructurings
 
Number of loans
   
Recorded Investment
   
Unpaid Principal Balance
   
Number of loans
   
Recorded Investment
   
Unpaid Principal Balance
 
   Commercial, financial & agricultural
    2     $ 372,862     $ 372,862       2     $ 342,917     $ 342,917  
   Real estate – construction
    14       7,931,144       8,150,517       9       6,342,581       6,639,087  
   Real estate – mortgage
    7       1,311,655       1,311,655       13       5,062,359       5,189,288  
Total troubled debt restructurings
    23     $ 9,615,661     $ 9,835,034       24     $ 11,747,857     $ 12,171,292  

The following table provides the payment status as of March 31, 2012 and March 31, 2011 of all loans that were restructured in the twelve month periods ending on those respective dates.

   
March 31, 2012
   
March 31, 2011
 
   
Number of loans
   
Recorded Investment
   
Number of loans
   
Recorded Investment
 
Restructured loans less than 30 days past due
                       
   Commercial, financial & agricultural
    1     $ 87,878       1     $ 141,380  
   Real estate – construction
    ––       ––       2       1,173,839  
   Real estate – mortgage
    2       621,531       ––       ––  
Total restructured loans less than 30 days past due
    3     $ 709,409       3     $ 1,315,219  
Restructured loans 30 days or more past due
                               
   Real estate – mortgage
    ––       ––       1       280,173  
Total restructured loans 30 days or more past due
    ––     $ ––       1     $ 280,173  
Restructured loans on nonaccrual
                               
   Real estate – construction
    1       31,067       1       1,462,825  
   Real estate – mortgage
    5       2,675,594       3       502,074  
Total restructured loans on nonaccrual
    6     $ 2,706,661       4     $ 1,964,899  

Loans classified as Special Mention or Substandard – Management evaluates all loan relationships periodically in order to assess the financial strength of the borrower and the value of any underlying collateral.  Loans that are found to have a potential or actual weakness are classified as special mention or substandard and subject to increased monitoring by management.  This typically includes frequent contact with the borrower to actively manage the borrowing relationship as needed to rehabilitate or mitigate the weakness identified.  At March 31, 2012, the Company had $35,325,000 in loans that were internally classified as Special Mention or Substandard, of which $28,290,000, or 80%, were either current or less than 30 days past due.  At December 31, 2011, the Company had $38,537,000 in loans that were internally classified as Special Mention or Substandard, of which $28,141,000, or 73%, were either current or less than 30 days past due.

We have established an allowance for loan losses through a provision for loan losses charged to expense on our statement of earnings. Additions to the allowance for loan losses are made periodically to maintain the allowance at an appropriate level based on management’s analysis of the potential risk in the loan portfolio. The allowance for loan losses represents an amount, which we believe will be adequate to absorb probable losses on existing loans that may become uncollectible. Our judgment as to the adequacy of the allowance for loan losses is based upon a number of assumptions about future events, which we believe to be reasonable, but which may or may not prove to be accurate. To the extent that the recovery of loan balances has become collateral dependent, we obtain appraisals not less than annually, and then we reduce these appraised values by the amount estimated for selling and holding costs to determine the liquidated value.  Any shortfall between the liquidated value and the loan balance is charged against the allowance for loan losses in the month the related appraisal was received. Our losses will undoubtedly vary from our estimates, and there is a possibility that charge-offs can reduce this allowance. Our determination of the allowance for loan losses is based on evaluations of the collectability of loans, including consideration of factors such as the balance of impaired loans, the quality, mix, and size of our overall loan portfolio, economic conditions that may affect the borrower’s ability to repay, commercial and residential real estate market trends, the amount and quality of collateral securing the loans, our historical loan loss experience, and a review of specific problem loans. We also consider subjective issues such as changes in the lending policies and procedures, changes in the local/national economy, changes in volume or type of credits, changes in volume/severity of problem loans, quality of loan review and board of director oversight, concentrations of credit, and peer group comparisons.
 
 
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An analysis of the activity in the allowance for loan losses is presented below:

   
For the Three Months Ended March 31,
 
   
2012
   
2011
 
Balance, beginning of year
 
$
5,221,736
   
$
6,007,690
 
Provision for loan losses
   
1,017,000
     
515,000
 
Loans charged off
   
(697,713
)
   
(499,947
)
Recoveries of loans previously charged off
   
272,209
     
93,301
 
Balance, end of period
 
$
5,813,232
   
$
6,116,044
 

The following tables provide additional information concerning changes to the allowance for loan losses within major loan categories:

   
For the Three Months Ended March 31, 2012
 
(In thousands)
 
Commercial, Financial & Agricultural
   
Real Estate - Construction
   
Real Estate - Mortgage
   
Consumer
   
Unallocated
   
Total
 
Allowance balance, beginning of year
  $ 644     $ 1,231     $ 3,041     $ 26     $ 280     $ 5,222  
Loans charged off
    (28 )     (394 )     (250 )     (26 )     ––       (698 )
Recoveries
    3       220       46       3       ––       272  
Provision for loan losses
    3       225       440       26       323       1,017  
Allowance balance, end of period
  $ 622     $ 1,282     $ 3,277     $ 29     $ 603     $ 5,813  
 
   
March 31, 2012
 
(In thousands)
 
Commercial, Financial & Agricultural
   
Real Estate - Construction
   
Real Estate - Mortgage
   
Consumer
   
Unallocated
   
Total
 
                                     
Allowance for loans individually
     evaluated for impairment
  $ 192     $ 480     $ 1,318     $ 5     $ ––     $ 1,995  
Allowance for loans collectively
     evaluated for impairment
    430       802       1,959       24       603       3,818  
Total allowance for loan losses
    622       1,282       3,277       29       603       5,813  
Loans individually evaluated for
     impairment
    901       6,312       8,938       5       ––       16,156  
Loans collectively evaluated for
     impairment
    10,453       38,916       181,916       1,634       ––       232,919  
Total loans
  $ 11,354     $ 45,228     $ 190,854     $ 1,639     $ ––     $ 249,075  

   
For the Three Months Ended March 31, 2011
 
(In thousands)
 
Commercial, Financial & Agricultural
   
Real Estate - Construction
   
Real Estate - Mortgage
   
Consumer
   
Unallocated
   
Total
 
Allowance balance, beginning of year
  $ 543     $ 358     $ 4,042     $ 326     $ 739     $ 6,008  
Loans charged off
    ––       (3 )     (497 )     ––       ––       (500 )
Recoveries
    13       ––       79       1       ––       93  
Provision for loan losses
    (290 )     20       608       6       171       515  
Allowance balance, end of period
  $ 266     $ 375     $ 4,232     $ 333     $ 910     $ 6,116  
 
   
December 31, 2011
 
(In thousands)
 
Commercial, Financial & Agricultural
   
Real Estate - Construction
   
Real Estate - Mortgage
   
Consumer
   
Unallocated
   
Total
 
Allowance for loans individually
     evaluated for impairment
  $ 98     $ 213     $ 826     $ ––     $ ––     $ 1,137  
Allowance for loans collectively
     evaluated for impairment
    546       1,018       2,215       26       280       4,085  
Total allowance for loan losses
    644       1,231       3,041       26       280       5,222  
Loans individually evaluated for
     impairment
    853       8,056       10,113       ––       ––       19,022  
Loans collectively evaluated for
     impairment
    14,186       43,307       176,451       1,701       ––       235,645  
Total loans
  $ 15,039     $ 51,363     $ 186,564     $ 1,701     $ ––     $ 254,667  

 
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Note 6 — Other Real Estate Owned

A summary of other real estate owned is presented as follows:

   
Three Months Ended March 31,
 
   
2012
   
2011
 
Balance, beginning of year